Current ESG ETF market: Growth, popularity, and regulatory developments

Executive summary

ESG ETFs are exchange-traded funds that focus on companies that meet environmental, social, and governance (ESG) criteria.

ESG ETFs have seen strong inflows, with more than $54 billion in net inflows in 2020 alone.

BlackRock is currently the largest provider of ESG ETFs, with over $100 billion in AUM in their ESG ETF offerings.

ESG ETFs have outperformed their non-ESG counterparts, with 70% of ESG ETFs outperforming their non-ESG counterparts in 2020.

The growth of ESG ETFs indicates a growing interest in sustainable investing and a desire among investors to align their investments with their values.

Introduction

ESG ETFs, which are exchange-traded funds that focus on companies that meet environmental, social, and governance (ESG) criteria, have experienced significant growth in recent years. Overall, the growth can be observed by the increase in the number ESG ETF assets under management, the continuation of the strong inflows, as well as the geographical diversity.

Main developments

ESG ETFs have seen rapid growth in recent years. In 2020, global ESG ETF assets under management (AUM) grew by 96% to reach a record high of $189 billion, according to data from ETFGI. There are now more than 300 ESG ETFs available globally, offering investors a wide range of options to choose from. These ETFs invest in companies that meet certain ESG criteria, such as low carbon emissions, diversity in leadership, and ethical business practices.

ESG ETFs are becoming increasingly popular, leading to more diverse geographic exposure, with ESG ETFs now available that focus on companies in Europe, Asia, and emerging markets. In the US, ESG ETFs attracted a net inflow of $20.9 billion in 2020, up from $4.3 billion in 2019, according to data from Bloomberg.There have been regulatory developments in the ESG ETF space. In Europe, the EU has introduced new rules that require fund managers to disclose the sustainability characteristics of their products, and to explain how they incorporate ESG factors into their investment decisions.

ESG ETFs have generally performed well in recent years, despite concerns that their focus on ESG factors might come at the expense of returns. In 2020, the MSCI ACWI ESG Leaders Index, which tracks companies with high ESG ratings, outperformed the MSCI ACWI Index by 1.3 percentage points, according to data from MSCI. In addition, ESG ETFs have outperformed their non-ESG counterparts in recent years. According to Morningstar, 70% of ESG ETFs outperformed their non-ESG counterparts in 2020.

Conclusion

In conclusion, the current state of ESG ETFs reveals a growing interest among investors in sustainable investing and a desire to align their investments with their values. The rapid growth of the ESG ETF market, with assets under management reaching a record high and the number of offerings increasing significantly, highlights the importance of ESG considerations in investment decisions. The outperformance of ESG ETFs in comparison to their non-ESG counterparts, coupled with their increasing diversification in terms of geographic exposure, indicates that sustainable investing is becoming increasingly mainstream. As ESG investing continues to gain momentum, ESG ETFs are likely to play an increasingly important role in investor portfolios.

References

Bloomberg. (2021). ESG ETFs Surge to Record $189 Billion in Assets Amid Greener Focus.

BlackRock. (2021). ESG Investment Insights.

ETF Trends. (2021). The Best ESG ETFs of 2021 So Far.

Forbes. (2021). ETF Outlook: ESG Investing And Innovation For 2021.

Morningstar. (2021). Sustainable Funds Weathered 2020 Better Than Conventional Funds.

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